Limits of arbitrage and their impact on market efficiency: Evidence from China

Jian Chen, Ahmad Haboub and Ali Khan

Global Finance Journal, 2024, vol. 59, issue C

Abstract: This paper examines the impact of limits of arbitrage (LOA) on market efficiency by considering a large sample of Chinese stocks. Intraday market efficiency is measured using two widely used measures: the intraday return predictability measure and the variance ratio measure. We find that LOA plays a major role in driving market efficiency. We also use an exogenous shock, the introduction of Shenzhen Stock Connect, which increases trade volume and lowers LOA, to examine the impact of LOA on market efficiency. Our results indicate that this event improves market efficiency regarding both our measures. Therefore, we conclude that policy makers in China are acting in the right direction to elevate China's status in world markets by adapting policies that inherently make the country more attractive to global investors by lowering LOA and enhancing market efficiency.

Keywords: Limits of arbitrage; Market efficiency; Chinese stock market; Intraday return predictability; And high-frequency trading (search for similar items in EconPapers)
JEL-codes: E44 F65 G12 G14 G15 G23 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:59:y:2024:i:c:s1044028323001114

DOI: 10.1016/j.gfj.2023.100916

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